Banking spreads challenging 8yr old levels! – InvestCap Research
By: Muniba Saeed, Invest Capital Markets Limited
+92-21-35205520-22 (Ext 8629)
In today’s Value Seeker, we present an update on the prevailing banking spreads as per the data recently released by SBP for Feb-13 coupled with our outlook.
Banking spreads hit a record low after Apr-05
Banking spreads (based on outstanding lending and deposit rates) struck an 8 yr record low of 6.18% in Feb-13. The last time such levels were witnessed was in April-05 when spreads on outstanding loans and deposits stood at 5.94% in April-05 consequential to a 7.49% average lending rate whereas average deposit rates stood at a meager 1.55%.
Outstanding spreads down by 112bps YoY in Feb-13
On a yearly basis, banking spreads have declined by a massive 112bps YoY from a level of 7.30% in Feb-12. Whereas deposit rates stepped down by 51bps YoY (to 5.34%) in Feb-13, the positivity induced by such was more than nullified by a turn down in average lending rates which fell by 163bps to a level of 11.52%. On a monthly basis the trend was however the same but with much less intensity as the spreads on outstanding lending and deposit rates fell by a slender 3bps. Such was the outcome of a sizeable decline in average lending rates, down by 8bps, however 5bps decline in deposit rates balanced the latter translating into a 3bps decline in spreads.
SBP directives to exert further pressure on spreads
Fresh spreads depict a similar trend, falling by 4bps on a monthly basis whereas the same declined by 166bps YoY to 4.45% in Feb-13. Deposit rates on fresh deposits prevailing at an altitude of 6.08% in Feb-13 whereas lending rates stuttering at 10.53%, directs the future path for banking spread.
Given that the current political and law and order situation in the country has been failing to promote investment and thus fresh disbursements by banks, we expect lending rates to experience further descend. We further anticipate an increase in deposit rates to realize from April-13 onwards as banks start paying interest on average balance of saving accounts instead of minimum as instructed by SBP in a recent circular therefore giving way to lower spreads going forward.